Isra-Mart srl: Falling oil prices and Greek crisis a boon to carbon traders

June saw the highest ever volume of carbon allowances traded in the European emissions market, as falling oil prices and concerns over Greece's ailing economy drove a flurry of activity, according to a new analysis.

Bloomberg New Energy Finance (BNEF) yesterday released figures showing volumes on the Intercontinental Exchange (ICE) – which accounts for about 91 per cent of the EU emissions market – reached 654MtCO2e for June, beating the previous March high of 584Mt.

Daily volumes hit a high of 78Mt on 23 June, again beating the previous one-day high of 53Mt on 16 March.

BNEF pointed to a combination of factors driving the increased activity, including concerns about an oversupply of emissions allowances, falling oil prices, the impact of the European Commission's proposed energy efficiency package and the precarious state of Greece's economy.

Guy Turner, director of carbon and power market research at BNEF, said the high volumes showed the market is efficient and currently functioning well. But he urged the commission to maintain a steady policy framework to prevent market volatility.

"If prices rebound over the next few weeks, trading activity should increase again on the upside of the curve, giving July a welcome boost in advance of the holidays," he said.

"The risk is that excessive volatility, particularly on the downside, could drive traders out of the market. This in turn could reduce future liquidity and market efficiency. To prevent this, it is important that the European Commission maintains co-ordinated energy and climate policies."

The news came as analyst firm Thomson Reuters Point Carbon again downgraded its forecast for the price of carbon during the third phase of the EU ETS, which runs from 2013 to 2020, predicting that a faster roll out of renewable energy capacity than previously assumed will drive down demand for carbon allowances.

The firm yesterday predicted carbon will cost an average of €22 per tonne from 2013-20, down from a forecast made in November of an average of €30 per tonne.

Anne Kat Brevik, commercial manager at Point Carbon, said the EU is likely to adopt a 25 per cent emissions reduction target for 2020, despite yesterday's vote by MEPs opposing plans to increase the target from 20 to 30 per cent.

She explained that if the 25 per cent target were adopted, it would require additional emissions reductions of one billion tonnes during Phase 3 of the EU ETS, resulting in an estimated average Phase 3 price of around €22 per tonne for the period.

The analyst firm said that in the event that other major economies agree to more demanding emissions targets, and the EU adopts the 30 per cent reduction target blocked yesterday, the average price range for EUAs for Phase 3 would rise to between €22 and €40 per tonne.

But if the EU does not agree to increase its emissions reduction target beyond the current 20 per cent, prices would remain significantly lower, averaging between €10 and €15 per tonne in Phase 3, said Stig Schjølset, head of EU carbon analysis at Point Carbon.

"We expect the market to be significantly long when the combined allocation of allowances and credits is taken into account," he said, adding that prices are expected to increase more rapidly towards the end of Phase 3, reaching €28 per tonne in 2020.

"At this stage, however, expectations and actual decisions regarding Phase 4 will probably be important, increasing the uncertainty on the price forecast for the final years of Phase 3."